The interconnectedness of banking systems across different countries means that each nation becomes susceptible to issues when crises occur in the banking systems of other countries.
A study by economist Roberto Panzica from the Bank of Portugal, based on a model applied to 22 banking systems and released today, assessed the impact on the Portuguese financial sector of defaults in foreign banking systems.
The findings indicate that “Portugal has one of the lowest contagion indices (0.3%) and the fourth lowest vulnerability index (1.2%)” among the countries analyzed, which the author attributes to Portugal’s relatively peripheral position.
The contagion index measures the capital losses that a default in one banking sector would cause in others. The vulnerability index measures the average losses a banking system would incur (normalized by capital) due to a default in the banking system of each of the other countries.
“Portugal’s peripheral position in the network of exposures between countries limits its systemic impact,” Panzica states.
In the study, the country with the highest contagion index is France, followed by the United States, the United Kingdom, and Germany.
For the vulnerability index, the most fragile country is the United Kingdom, followed by France, Germany, and Spain.
In 2008, the collapse of the real estate market in the United States and the widespread default on (high-risk) mortgage credit led to bank failures and triggered a global financial crisis.
Recently, concerns have been raised about bad loans in regional U.S. banks, which has resulted in some losses in European bank stocks.
